MERGERS & ACQUISITIONSIN THE SEMICONDUCTOR INDUSTRY

COULD CHINA CAUSE CONTINUED

CONSOLIDATION?

SEMI Advanced Semiconductor Manufacturing Conference (ASMC 2016)

May 16-19, 2016

Saratoga Springs, NY

WHAT’S DRIVING THE URGE TO MERGE?

• “Organic” growth is slowing so go “Inorganic”

• Enter new markets;

• Enter new geographic regions – geographic diversification

• Enter new product areas- product diversification

•Greed - Increase profitability by increasing scale

• Fear – Eat or be Eaten

• China or fear of China

WHAT'S DRIVING SEMICONDUCTOR M&A?

Source PWC & Morgan Stanley

2015 WAS A VERY BUSY YEAR

2015 HAD SOME “MEGA MERGERS”

REASONS FOR M&A

CHINA GETS INTO THE M&A FRAY

WILL SEMICONDUCTOR MERGERS CONTINUE?

• Yes, but maybe not at the same pace…..Are good deals gone?

• Intel still needs to offset PC dead end

• Smartphone slowdown may further drive consolidation

• China is just getting started and has “catching up” to do……

• R&D costs have gone up exponentially

• The cost of developing a new chip is not cheap

• The need to accumulate IP & patents

SEMICONDUCTOR EQUIPMENT M&A

• The industry has increased deal size

• Advantest/Verigy, AMAT/TEL and now Lam/KLA

• Yield management needs work – Nanometrics, Nova, Rudolph

• Back end remains untouched

•What about Japan? Hitachi, TEL, DNS

• Subsuppliers – MKS, AE, Brooks

• Can China buy its way in? Mattson as a start?

WHY CHINA CARES ABOUT CHIPS

• China consumed $145B of Chips

in 2015 but only produced 10%

of them

•Wants to produce 70% in 10

years

•Wants to catch up

technologically by 2030

• China only produces low end

devices

•Military aspirations

CHINA’S $100B CHECKBOOK CAN DRIVE M&A

• Tsinghua Unigroup is a “puppet” of the Chinese government

• Formerly Tsinghua Beijing University

• Has mandate to spend at least $100B to get into semis

• China to do in semis what it did in solar & LED

•Made a $23B bid for Micron – That ultimately failed

• Paid $2.6B for Spreadtrum & RDA Microelectronics

• Intel bought 20% stake for $1.5B

• Affiliate recently bought Mattson

CHINA IS THE NATURAL EVOLUTION OF SEMIS

• Semis started in the US then moved to Japan as a lower cost

developing economy

• Taiwan, then Korea followed the same path of developing

economies after Japan

• China is the latest entrant to the market of microelectronics

producers

• The US and Japan are fading out as semi makers

• Virtually no consumer electronics is manufactured in the US

• China is just accelerating a natural evolution with cash

SUMMARY• Consolidation will continue at a higher than average pace

• Slower organic growth drives need for more inorganic growth

• China’s entry will increase valuations and accelerate pace

• Semiconductor industry may be “Zero sum game” in which declines in the US

and Japan are offset by increases in China –flat capex & chip sales

• Will China get there before the end of the party?

• China will grow faster than Taiwan or Korea did due to government money

accelerating the natural process

• “Reunification” with Taiwan could be the end game

• Could China buy GLOBALFOUNDRIES?